Could a brass plaque fix "passporting" after Brexit? If only life was that simple

24 June 2016

One of the key issues facing financial services institutions which provide services across the EU is the potential loss of passporting rights.

This affects both businesses and products (e.g. UCITS). Suggestions were made by some in the Brexit debate that even if no agreement is reached to replace the current passporting regime with equivalent rights, a solution to the loss of passporting rights could be offered by a "brass plaque" presence in the EU.

If only life was that simple.

The position is, unsurprisingly, complex – though it begins with a simple "no". As is well understood by those in the sector, in the absence of a passporting regime, if a financial services institution will be conducting regulated activity on both sides of the new UK/EU border then the starting point is likely to be a requirement for the relevant entity also to be regulated and authorised appropriately within the UK and within the EU for the activities it is conducting in each jurisdiction or to establish another regulated group company across the border. This could result in significant expense, duplication of governance and control functions and additional capital requirements for the additional entity, all of which the "brass plaque" offers no remedy for.

However, with the reports of the potential relocation of staff and operations from the UK to the EU on Brexit, will come pressures on retaining talent and securing suitable office space in potential recipient markets, such as Paris, Frankfurt, Dublin or Luxembourg. This in turn raises the question of whether a UK firm can establish a physical EU presence, regulated in the EU and how much of the regulated activity and back office functions can effectively be "outsourced" outside the EU back to the current UK entity. This could offer some mitigation against the potential disruption of moving entire UK operations into the EU.

Much will depend on the regulations and regulatory policies on either side of the border, as well as the activities being conducted. Local regulators of the EU entity may also want to ensure, in respect of any regulated entity for which they are responsible, that the entity is itself a substantial organisation with its own mind and management – this could affect the scale to which an outsourced model could be applied.

As we take on board Brexit decision day, we have sought a couple of insights from our team of experts across the EU on this new conundrum:

From an Italian perspective, Italian regulators are already concerned about current home state regulator supervision of cross border financial services. There would therefore likely be reluctance to accept a significant movement to brass plaque banks in Luxembourg/Dublin carrying out activity in Italy, supported by material UK operations. While this approach may be viable for products (e.g. UCITS), Italian regulators would be unlikely to view this as a viable solution for significant financial services, unless they felt the new home state regulator could and would effectively supervise the activities. Jeff Greenbaum, Hogan Lovells, Italy

"A key point to understand about the regulatory framework in Germany, is that there is a political element to the regulator's role. Assessment of the "equivalence" necessary to benefit from certain EU rules may not be limited to whether the UK continues to have a regulatory framework which replicates the EU framework but also factor in its enforcement policy. There can also be long lead times to acquire the authorisations which would be necessary to move elements of its operations from the UK and a German regulator would require the top management functions of a German bank to be exercised in Germany. Germany is looking forward to hosting the top management of the respective British banks as the top management functions of a German Bank cannot be outsourced."Christian Reichmann, Hogan Lovells, Germany

Clearly there will be plenty of new challenges to navigate in the days and months ahead but, with our team of experienced financial regulatory lawyers across Europe, we can work with you to optimise your response.